Factors impacting budgets for fiscal year 22 – Notice

It is necessary to identify some of the factors likely to have an impact on the main budgetary amplitudes of the federal and provincial budgets for 2021-2022. These factors are positive or negative.

Positive factors are identified first. The major boost that will be given to RBF revenues is the prospect of faster growth in 2020-2021 of industrial production due to the low “ base effect ”, especially after the Covid-19 attack . Some key industries that contribute sales tax and excise duty revenues are showing exceptional dynamism. These include industries such as sugar, POL products, cement, cigarettes and automobiles. 1% faster growth in industrial production contributes an additional 33 billion rupees to RBF revenues.

While the rise in oil prices can be seen as leading to higher inflation, it is undoubtedly contributing to an increase in import duty and sales tax revenue. The price of oil on the world market has risen from $ 35 per barrel in June 20 to over $ 67 per barrel today. The average price in 2020-2021 will likely be close to $ 57 a barrel. If the price remains at $ 67 per barrel in 2021-2022, additional tax revenue could reach Rs 100 billion.

Overall, if the economy grows faster by 1 percentage point in 2021-2022, given the high elasticity of demand for imports, the overall quantity level of imports could grow faster by 1.3% . This will bring additional income of over 30 billion rupees.

The main source of income tax withholding comes from contracts. Currently, construction activity is booming in the country due to incentives for real estate development and more concessional credits for low cost housing. A faster 1% growth in construction activity, both directly and indirectly, can generate higher tax revenues of Rs 15 billion.

As for the negative factors, first there is the drastic reduction in petroleum tax rates in recent months to neutralize the impact of the rise in international prices of petroleum products. This has important implications for the level of income. Annual revenues of up to Rs 500 billion from the tax were achievable when the rate was Rs 30 per liter for both HSD oil and Spirit engine. Now the rates are 12 and 10 rupees per liter respectively. If they remain unchanged in 2021-2022, it could lead to a significant loss of revenue of nearly Rs.315 billion.

The positive impact of a stronger rupee is considerable, especially downstream on the rate of inflation. However, by reducing the value of the rupee of imports, it implies a lower tax base for import-related taxes. The likely average value of the rupee is likely to be close to Rs 161 per dollar for the year 2020-2021. It is currently operating at less than Rs 155 per dollar. If this exchange rate remains unchanged in 2021-2022 or if the rupee appreciates a little more, the loss of income could be 70 billion rupees.

There are also some factors that work on the expenditure side. Since 2018-2019, the military establishment has focused on economics of defense spending to facilitate the management of public finances by the civilian government. Currently, spending on defense services is expected to increase from 2.7% of GDP in 2020-2021 to 2.5% of GDP in 2021-2022. This implies an expenditure saving of over 105 billion rupees.

The sharp drop in the SBP’s key rate after the first Covid-19 attack from 13.25% to 7% is now starting to deliver results in terms of lower growth in domestic debt servicing costs. According to projections, this is expected to drop from 6.1% of GDP in 2020-2021 to 5.9% of GDP in 2021-22, which will again result in a saving of 105 billion rupees.

The main factor that will contribute to the increase in current spending is the impending increase in wages and pensions that will be announced by the federal government in the budget. Likewise, the two governments of Punjab and Khyber-Pakhtunkhwa have also announced similar awards. The Federal Government has provided for this purpose in the Medium Term Budget Strategy Paper (MTBS) 260 billion rupees for this additional expenditure. If the four provincial governments announce increases in pensions and wages of a similar magnitude, the combined cost to these governments will be in the region of Rs300 billion.

A new factor is the need for a larger subsidy to the power sector in order to also finance the payment of arrears to the IEPs. There is no explicit provision for this is MTBS. However, the next federal budget could include up to Rs 200 billion for this purpose.

Overall, it is likely that the fiscal implications of negative factors, both on the revenue and expenditure side, will significantly exceed the impact of positive factors by almost Rs 700 billion, or 1.3% of GDP in 2021. -2022. This will imply that the budget deficit in 2021-2022 will persist in a range of 7 to 7.5% of GDP.

The agreement with the IMF was originally aimed at reducing the budget deficit from 7% of GDP in 2020-2021 to 5.5% of GDP in 2021-2022. MTBS has proposed a higher target of 6.0% of GDP for next year. Apparently, the target is now 6.3 percent of GDP according to the presentation recently made to the Finance Committee of the National Assembly by the Ministry of Finance.

The higher projected deficit of 6.3% of GDP is still underestimated given the net impact of the negative factors highlighted above. Inevitably, the consequence will be a reduction in development spending, which is expected to play a key role next year in stimulating the economy. The proposed size of the federal PSDP for 2021-2022 is Rs 900 billion. This may need to be reduced by more than 20 percent and still involve a deficit greater than the target level.

The year 2021-2022 promises to be difficult given the impact of major negative factors such as the reduction in oil tax revenues, a large salary and retirement allowance and the need to take measures to reduce the circular debt. of the electricity sector. This will dominate over the contribution of positive factors.

Hopefully the IMF will continue to show its understanding of the difficult situation the country faces following the successive COVID-19 attacks. It may be necessary to provide performance waivers in the sixth and subsequent exams. The IMF should be reminded that up to twelve waivers were granted during the duration of the last IMF program from 2013 to 2016.

(The writer is professor emeritus at the BNU and former federal minister)

Copyright recorder, 2021

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About Aldrich Stanley

Aldrich Stanley

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